What Is Estate Planning?
planning is lifetime planning for the distribution of your assets at death.
When you die, your assets can pass according to your intent, or by default.
if death occurs in either of the years 2002 or 2003 and the total of all
your assets is more than $1,000,000 for an individual or twice that, $2,000,000,
for a married couple, you will owe some estate tax to the IRS Estate Tax
Collector unless you are able to implement suitable planning. If your
net worth, including your house, is at that bracket or above, you may
find it useful to look at our section, Using life insurance to pay estate
are more interested in a few general estate planning principals, then
a few estate planning basics
is your estate?
For most people, your estate consists of real estate, retirement benefits,
personal property - in the form of cash, furniture, your personal effects,
cars, etc. - life insurance, and perhaps an interest in a business.
objectives 1. Controlling your assets until death, 2. Quick and confidential
distribution of your estate according to your intent at death, 3. Consistent
with implementation of your intent, maintenance of minimum estate administration
expenses during life and after death.
estate distribution methods 1. By operation of Law, for example through
intestate succession or joint tenancy with right of survivorship, 2. By
will subject to probate, 3. By trust.
recipients of your estate 1. Family and friends, 2. Charity, or the 3.
IRS Estate Tax Collector.
if you die without a legally valid estate plan?
If you die without a legally valid estate plan (will/trust documents),
the law of intestate succession will determine who will own your property.
Your intent, even known by relatives or friends can do little to influence
the court. The court must follow the intestate succession laws of your
Probate is a legal process involving lawyers and court by which an estate
is settled on behalf of a deceased person. It includes court validation
a deceased person's estate related documents, and things like paying debts,
taxes, fees, and distributing property as directed in a will. Most states
do not require a probate proceeding for estates less than a certain sum.
is a will?
A will is a document subject to state law that delineates how your assets
are to be distributed at death. It can designate things like a guardian
for minor children, which assets should pay debts, taxes, fees, and of
course, name particular beneficiaries of the estate. It can also create
is a trust?
trust is a document subject to state law that creates an arrangement by
which you as a trustor or grantor place property in trust for the benefit
of a beneficiary(ies). You name a trustee to manage the trust assets,
known as the trust res.
trust is one for which you can change the trust terms or even cancel the
trust during your life. If you do not do so the terms become irrevocable
at your death. One type of revocable trust is often referred to as a living
trusts usurp your ownership and control over trust assets. A common reason
for using an irrevocable trust is to remove from your estate the assets
transferred to the irrevocable trust. One purpose of such a transfer is
to reduce taxes owed at death.
A conservatorship or guardianship proceeding, sometimes known as a living
probate, occurs when someone becomes mentally incompetent. Then a probate
court appoints someone to manage a disabled person's personal and business
affairs. Conservatorship can be expensive, lengthy, and uncomfortable
for family members.
and wills and trusts
Since a will has no power until death, a will cannot avoid a conseratorship
proceeding. However, a well drafted revocable living trust can avoid conservatorship.
In a trust you state your intent in advance with regard to mental or physical
incapacity. As trustee you select the person to carry out your intent
so that a conservatorship proceeding is unnecessary.
ways property is owned.
Separate Property - property owned by one spouse, to the others exclusion,
in a community property state. Community Property - marital property owned
by both spouses in community property states. Joint tenancy with right
of survivorship - often known merely as joint tenancy. What is it and
why do so many people use it? It is a form of ownership where two or more
persons, married or not, both own property jointly. Unlike other forms
of joint ownership, tenancy in common for example, the surviving owner(s)
acquires a deceased owner's interest at death.
a joint tenant's interest passes to the surviving joint tenants by operation
of law, immediately at death, property in joint tenancy is not controlled
by a joint tenant's will.
Joint Tenancy avoid Probate?
Yes, it avoids probate upon the death of the first of two or more joint
tenants to die. When the second or last person dies the asset becomes
subject to probate unless the asset was sold, gifted from the estate,
or transferred to a trust prior to death.
Joint Tenancy avoid a conservatorship?
tenancy and income tax problems in community property states
Although ownership by joint tenancy is common it has a significant tax
disadvantage for married couples in a community property state like California.
The problem occurs when a married couple takes title in joint tenancy,
and where one spouse subsequently dies and then the survivor sells the
asset for a gain.
Dick and Jane, husband and wife, bought a $250,000 home, taking title
in joint tenancy, 50% each. For income tax purposes each received a basis
dies and then Jane sells the home for $500,000, Jane's income tax basis
is $375,000. At Dick's death his one-half, $125,000, interest received
a step up in tax basis to $250,000. However, Jane's one half interest
remains at $125,000 for a total basis of $375,000.
sold the house for $500,000, she created a taxable gain of $125,000 (the
$500,000 selling price minus her recently adjusted $375,000 basis). Assuming
the house was held long-term for tax purposes, the tax owed was $25,000.
if Dick and Jane owned the home as community property, Jane would have
avoided paying $25,000 in long-term capital gains tax. With community
property, a surviving spouse receives a step up in basis on the half she
owns as well as on the half she receives from her deceased spouse. Had
the house been owned as community property, the adjusted basis would have
with a $500,000 income tax basis that is sold for $500,000 triggers no
taxable gain. No gain means no tax.
title to an asset in joint tenancy can create other unintended consequences
as well. If you have questions about estate planning you should consult
a qualified estate planning attorney.
life insurance to pay estate tax
The impact of the estate tax is predictable. Three categories of asset
liquidity exist:those that are liquid, those that are relatively liquid,
and those that are not liquid. The IRS Estate Tax Collector wants liquid
assets to satisfy any tax which is owed. That means cash. This legal tender
must be paid within nine months of death. Your family gets what remains.
Federal Unified Estate and Gift Tax
Federal estate tax is really a Federal Unified Estate and Gift Tax. It
is one tax applied to large gifts during life and large estates at death.
It's purpose is to tax asset transfers similarly whether made during life
or at death.
transfer tax rate schedule for estate and gift taxes is progressive (more
tax owed on larger taxable estate values). Tax is first figured on the
cumulative taxable transfers made during life (lifetime gifts) which exceeded
the annual gift tax exclusion (generally $10,000 per beneficiary) in the
year made. Then that cumulative figure is added to the tax owed on all
taxable transfers at death.
The Economic Recovery Tax Act of 1981 provided for an Unlimited Marital
Deduction, and a larger Unified Credit. The Unlimited Marital Deduction
enables a spouse to pass his or her entire estate to the other spouse
free of any gift or estate tax. However, exercising the Unlimited Marital
Deduction, though a boon to a surviving spouse, extinguishes, unused,
a deceased spouses' Unified Credit.
The Unified Credit is a dollar for dollar credit against the Federal Unified
Estate and Gift Tax.
The dollar amount of taxable estate assets which will use up an individual's
unified credit is known as the exemption equivalent. In other words, the
exemption equivalent is the size of estate you can leave without paying
federal estate and gift tax.
exhausting an individual's unified credit the Federal Unified Transfer
Tax Rate Schedule for taxable estates and lifetime gifts begins at 37%
for an estate size of $675,000 in years 2000 and 2001:
amount of tax which the unified credit offsets
to be taxed
tentative tax is
of such amount
plus 20% of excess over $10,000
plus 22% of excess over $20,000
plus 24% of excess over $40,000
plus 26% of excess over $60,000
plus 28% of excess over $80,000
plus 30% of excess over $100,000
plus 32% of excess over $150,000
plus 34% of excess over $250,000
unified credit is extinguished within the first bracket below. It is in
that bracket that $675,000 in assets, the exemption equivalent (double
for a married couple), and the unified credit, $220,550, fall.
plus 37% of excess over $500,000
plus 39% of excess over $750,000
plus 41% of excess over $1,000,000
plus 43% of excess over $1,250,000
plus 45% of excess over $1,500,000
plus 49% of excess over $2,000,000
plus 53% of excess over $2.5 MM
plus 55% of excess over $3MM
will the tax be paid?
There are only five ways to pay estate tax, which again, is due within
nine months from date of death.
and maintain a sinking fund.
A mere delay in the out of pocket expense because a loan must be repaid,
with interest. If the loan is taken against collateralized property,
problems of valuation in a buyers' market may further reduce the values
or liquidate assets. All markets, commercial real estate, residential
real estate, and of course securities, experience buyers' and sellers'
markets. Which will you die during? If real estate is mortgaged, then
more than one property may need liquidating to find the right amount
of equity to give to the IRS estate tax collector. Multiple real estate
transactions mean multiple charges to the estate for fees and expenses.
Of course, all the future growth and income from such assets is lost.
insurance. You set up an irrevocable insurance trust and qualify for
coverage with regard to satisfactory health. The irrevocable trust buys
and owns an insurance policy on your life. It pays a premium(s). You
die. The life insurance company pays to the irrevocable trust a cash
death benefit. Your irrevocable trust, trustee, exchanges the death
benefit cash in the irrevocable trust for assets in your estate. Your
estate uses the cash to pay the tax. Your trustee manages the trust
assets(purchased from your estate...house, cars, stocks, etc.) for the
benefit of the irrevocable trust beneficiaries. Typically, beneficiaries
are your loved ones. The trustee often is a family member, too.
life insurance policy used for paying estate taxes for married couples
is survivorship life, also known as second-to-die insurance. It insures
two lives. It pays its death benefit only after the second death.
Its premiums are less than premiums on like coverage for a single-life
- A combination
which would you prefer? Send what might be a substantial and significant
portion of your estate, perhaps even a business you built with blood,
sweat, and tears, to the IRS Estate Tax Collector to benefit a couple
hundred million plus strangers, or send a much less significant amount
of premium(s) to an insurance company to preserve the integrity of your
estate for family, friends, and charities?
economy of scale of the life insurance method is understood, the life
insurance premium rarely is seen as the problem. It's seen as the solution
to the problem.
allow one of our qualified life insurance specialists to assist you in
obtaining the information you want so you can make an informed decision.
free phone call or an e-mail you can take the first step toward seeing
if using life insurance is a good way for you to insure that your estate
goes to those you desire.
technology and traditional service we provide you with all the information
you need to make the right decision for you.
Toll Free at 800-930-6162 or e-mail us at firstname.lastname@example.org
learn more about how life insurance can provide complete financial security
for your family, protect your business, pay off your mortgage, or even
pay your estate taxes, please visit Family Protection,
Business Ins., Mortgage
Ins. or Estate Plans. Or, if you want some
basic information on estate planning for estates below the estate tax
level, click on basic estate planning.
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